Is the housing market recovering? Should you buy?

After years of declining home prices many "experts" believe the housing market is beginning to stabilize and will recover through 2010 and into 2011. Logic, reason, and economic fundamentals suggest otherwise.

A few important facts to consider about the housing market.

Between 2000-2006 the housing market experienced the largest price bubble in US history (no kidding). US home prices rose a little more than 100%, which has never happened nationwide. This bubble was fueled by low interest rates (thanks Greenspan), fraudulent loans, and the assumption that home prices could never drop. Below is a chart, which shows the mania.


Focus your attention on the inflation-adjusted data because it is more important than simply nominal prices. Between 1970 and 1998 prices remained almost flat. Then we seek the explosion higher. This problem will eventually be corrected two ways: massive inflation or nominal home price declines by 10-20%.

The US government has desperately tried to prevent home prices from falling by handing out tax credits ($8,000) to encourage people to buy homes. Won't this support the housing market and stabilize prices? In the short term it will but eventually the market always finds a way of clearing excesses in the market. The problem with home prices is that they are still overvalued. The chart below shows existing home sales and total months of supply of homes. You will notice that the number of home sales jumped because of the government-induced stimulus. The current credit expires in June 2010. You will also notice that sales have already started to fall beginning in 2010. Why? When you give an artificial incentive to buy a product it drains future demand by pulling the demand to the present. So what we are seeing is that even with the tax credit available, people who want to buy a home have already done so. This will now be a drag on future demand.


Source http://themessthatgreenspanmade.blogspot.com/2010/03/existing-home-sales-fall-further.html

You will also notice that the supply of homes is rapidly rising again after a large drop thanks to government handouts. The supply of homes will need to fall to at least 5 months of supply before you will see any type of stabilization in the housing market.

Along with government incentives the Federal Reserve has reduced interest rates to an all-time low and purchased (with electronically created money) $1.25 trillion in mortgage backed securities to keep down mortgage rates. This program expires at the end of March 2010. If you look at a chart you will see that mortgage rates are also near all-time lows. With mortgage rates this low they have only one way to go.




When rates rise (and they will) to 7-8% this will put extreme stress on the housing market and precipitate declines in home prices. Why? Pretty simple--the higher the interest rate the lower the amount you can afford. You might be thinking that now is the right time because you can lock in low interest rates. There are two schools of thought concerning this.

1. If you intend to live in your home for the next 10-15 years and can easily afford the monthly payments, PMI, property taxes, repairs, and insurance then it might make sense. You will have to be able to withstand the possibility of home prices falling a further 10-20% in value and likely moving sideways for a few years. The best deals will be found in foreclosures or distressed sellers. Under these circumstances it might make sense to purchase a house.

2. If you are the average American who changes homes every 5 years and would be negatively impacted by falling home prices-- wait until prices fall further. Even if it means you will have to pay a higher interest rate. After all you can always refinance in the future. The worst case would be to get suckered into a low rate mortgage and watch home prices fall as interest rates rise. You will be underwater and unable to sell your home (unless you have the money to pay the bank the difference).

Conclusion

A home is not an investment--it is a place to live. Do not expect to make money (in real inflation adjusted terms) with your home. Right now there is no reason to charge ahead and purchase a home thinking that you have to get in now before prices rise. Finally, and I cannot stress this point enough NEVER LISTEN TO THE NATIONAL ASSOCIATION OF REALTORS!! This is one of the more duplicitous, deceitful, and deceptive organizations operating in the US. They lie about everything in a desperate attempt to scare you into buying a home "before it is too late." According to their propaganda the housing market never collapsed but is always on the verge of recovering. Don’t fall for this trick. Know the facts.

Black Swan Insights

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